How the U.S. won the global rebalancing game

Opinion: Expect a more sustainable economy and better jobs picture

By

MichaelCasey

Columnist

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No longer do Americans deserve to be called the world’s “consumers of last resort.”

A striking decline in the U.S. trade deficit to its lowest level in four years in November reflects an ongoing improvement in the nation’s exports and a dramatic decline in its dependence on foreign goods and services. Both of those will improve the economy’s sustainability and job-creating potential. But for many in the rest of the world, it’s a frustrating turn of events.

The U.S. economy is in the best shape of the past six years — underscored by everything from purchasing manager surveys to stronger construction spending — and is outperforming most of its advanced-country peers. But whereas past periods of U.S. outperformance coincided with increased American spending on imports and a widening deficit, the opposite is happening now. Deficits are not only falling as a proportion of GDP; they are declining in absolute terms — a complete about-face from prior trends.

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The U.S., “is growing, but it’s not exporting any more of that growth overseas,” says Lena Komileva, chief economist at G+ Economics. That means that export-oriented Asian economies such China and Taiwan, as well America’s big regional trading partners, Canada and Mexico, are yet to see their traditional pickup when demand returns to the world’s largest economy.

There’s an unfortunate inevitability to this, since it reflects a correction from the unstable imbalances that persisted before the financial crisis of 2008-2009, when a binge-spending U.S. would buy and borrow from countries like China and Japan, nations where the opposite problem of repressed domestic spending left an excess of both goods and savings.

The U.S. trade deficit got to 6% of GDP at the end of 2006; it’s now about 2.5%. A similar decline has been seen in the current account deficit, which measures the full array of America’s transactions with the rest of the world. On the flipside, China’s current account surplus has dropped from 10.1% of GDP in 2007 to around 2.3%. The crisis was the breaking point that corrected those imbalances.

“As economists at the time were saying, that size of external imbalances was just unsustainable,” says Paul Sheard, chief global economist at Standard & Poor’s Ratings Services. “There were two ways it would unwind: in a disorderly fashion or an orderly one. It turned out to be disorderly.”

The rebalancing has manifested in the U.S. manufacturing more cars at home, producing more domestic energy — for which it was helped by the shale oil and gas revolution — and buying fewer credit card-funded knickknacks. But it has also translated into losses for manufacturers from other countries. Unable to fall back on American consumer markets and with China’s rising domestic demand initially focused on commodities, their idle factories have saddled emerging market economies with excess capacity. And that has had a disinflationary impact on world prices.

One fix for these foreign exporters would be a stronger dollar, which would boost their competitiveness. But until the Federal Reserve signals its intent to raise short-end interest rates, an overwhelming demand for dollars is unlikely to come forth and drive up the exchange rate. Nor can they expect their governments to lobby Washington on their behalf. For many emerging market authorities, the status quo is the lesser of two evils: they’re more spooked by the threat that tighter U.S. monetary policy could drive capital out of their economies than by competition from a comparatively weak U.S. dollar. Read why the world will love the dollar again.

That — along with the stubborn refusal of the European Central Bank to fight deflation with U.S.-style quantitative easing — is why the euro is 4% stronger than the dollar from a year ago, even though the U.S. has clearly outperformed the euro-zone economy. And, when contrasted with the expectation that Chinese authorities will let interest rates rise as they liberalize their financial sector and curtail a debt bubble, the Fed’s commitment to keep rates “low for longer” also keeps the Chinese yuan close to record highs.

All this leaves the U.S. in a comparative sweet spot.

Ideally, other economies would be joining the U.S. in economic recovery, boosting aggregate global demand to the benefit of all. But circumstances and policy imperatives will constrain foreign growth in the medium-term. So, the U.S. gets the next-best thing: an accelerating domestic recovery, facilitated by accommodative monetary policy, low inflation and an anchored dollar.

Compared to anywhere else, that’s an attractive proposition for investors.

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